EXERCISES

Ex. 160
The following information is available for Harold Company:
Beginning inventory 600 units at $5
First purchase 900 units at $6
Second purchase 500 units at $7

Assume that Harold uses a periodic inventory system and that there are 700 units left at the end of the
month.

Instructions
Compute the cost of ending inventory under the
(a) FIFO method.
(b) LIFO method.
6-2 Test Bank for Accounting Principles, Eighth Edition

Solution 160 (7 min.)

(a) FIFO Ending Inventory Cost:
500 × $7 = $3,500
200 × $6 = 1,200
$4,700

(b) LIFO Ending Inventory Cost:

600 × $5 = $3,000
100 × $6 = 600
$3,600

Ex. 161
Using the information in Ex. 160 above, compute each of the following under the average-cost method:

(a) Cost of ending inventory.

(b) Cost of goods sold.

Solution 161 (7 min.)

Average cost/unit = $5.95 ($11,900  2,000)

600 × $5 = $ 3,000
900 × $6 = 5,400
500 × $7 = 3,500
2,000 $11,900

(a) Cost of ending inventory = $4,165 (700 × $5.95)

(b) Cost of goods sold = $7,735 (1,300 × $5.95) or $11,900 – $4,165

Ex. 162
Morton Company uses the periodic inventory method and had the following inventory information
available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 400 $5 2,000
7/25 Purchase 200 $7 1,400
10/20 Purchase 300 $8 2,400
1,000 $6,200

A physical count of inventory on December 31 revealed that there were 400 units on hand.
Ex. 162 (cont.)
Instructions
Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is
$ .

2. Assume that the company uses the Average-Cost method. The value of the ending inventory on
December 31 is $ .

3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is
$ .

4. Determine the difference in the amount of income that the company would have reported if it had used
the FIFO method instead of the LIFO method. Would income have been greater or less?

Solution 162 (20 min.)

1. FIFO: Ending inventory $3,100
300 units @ $8 = $2,400
100 units @ $7 = 700
400 units $3,100

2. Average Cost: Ending inventory $2,480

$6,200 ÷ 1,000 = $6.20 per unit × 400 units = $2,480

3. LIFO: Ending Inventory $1,900

100 units @ $4 = $ 400
300 units @ $5 = 1,500
400 units $1,900

4. FIFO: Cost of goods sold $3,100 LIFO: Cost of goods sold $4,300
100 units @ $4 = $ 400 300 units @ $8 = $2,400
400 units @ $5 = 2,000 200 units @ $7 = 1,400
100 units @ $7 = 700 100 units @ $5 = 500
600 units $3,100 600 units $4,300

Income would have been $1,200 ($4,300 vs. $3,100) greater if the company used FIFO instead of
LIFO.
6-4 Test Bank for Accounting Principles, Eighth Edition

Ex. 163
Dixen Company sells many products. Whamo is one of its popular items. Below is an analysis of the
inventory purchases and sales of Whamo for the month of March. Dixen Company uses the periodic
inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Sales 60 $90
3/25 Sales 40 $90
3/30 Purchase 40 $60
Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show
computations)
(b) Using the weighted average method, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March
31. (Show computations)

Solution 163 (20 min.)

Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Sales 60 $90
3/25 Sales 40 $90
3/30 Purchase 40 $60
400 250
(a) Using FIFO - the earliest units purchased were the first sold.
3/1 100 @ $40 = $ 4,000
3/3 60 @ 50 = 3,000
3/10 90 @ 55 = 4,950
250 units $11,950 = the cost of goods sold
(b) Calculate the weighted average unit cost:
$20,400 ÷ 400 = $51
$51 × units in ending inventory (400 available less 250 sold = 150)
$51 × 150 = $7,650
(c) There are 150 units in ending inventory. They are comprised of the first units purchased when
LIFO is assumed.
3/1 100 @ $40 = $4,000
3/3 50 @ $50 = 2,500
150 units $6,500 = ending inventory
Ex. 164
Yenn Company uses the periodic inventory system to account for inventories. Information related to Yenn
Company's inventory at October 31 is given below:
October 1 Beginning inventory 400 units @ $10.00 = $ 4,000
8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.60 = 2,320
Total units and cost 2,000 units $21,120

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain
on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if 550
units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain
on hand at October 31.

Solution 164 (20 min.)

1. 550 units in ending inventory.
Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24
200 units @ $11.60 = $2,320
10/16 350 units @ 10.80 = 3,780
550 units $6,100

2. 550 units in ending inventory.

Under average cost method, the weighted average cost per unit must be computed.
$21,120 ÷ 2,000 units = $10.56
550 units × $10.56 = $5,808

3. 550 units in ending inventory.

Under LIFO, the units remaining are the ones purchased earliest. 10/1
400 units @ $10.00 = $4,000
10/8 150 units @ 10.40 = 1,560
550 units $5,560

Ex. 165
Sims Company is in the electronics industry and the price it pays for inventory is decreasing.

Instructions
Indicate which inventory method will:
a. provide the highest ending inventory.
b. provide the highest cost of goods sold.
c. result in the highest net income.
d. result in the lowest income tax expense.
e. produce the most stable earnings over several years.
6-6 Test Bank for Accounting Principles, Eighth Edition

Solution 165 (4 min.)

a. LIFO
b. FIFO
c. LIFO
d. FIFO
e. Average cost

Ex. 166
Utley Company reported the following summarized annual data at the end of 2008: Sales
revenue $1,000,000
Cost of goods sold* 600,000
Gross margin 400,000
Operating expenses 250,000
Income before income taxes $ 150,000
*Based on an ending FIFO inventory of $250,000.

The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO.
He has determined that on a LIFO basis, the ending inventory would have been $200,000.

Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Utley's income tax expense, net income,
and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed
change?

Solution 166 (25 min.)

(a) Restate to a LIFO basis:
Sales revenue $1,000,000
Cost of goods sold* 650,000
Gross margin 350,000
Operating expenses 250,000
Income before income taxes $ 100,000

*Ending inventory would be $50,000 less ($250,000 – $200,000 = $50,000) under LIFO, thereby
increasing cost of goods by $50,000.

(b) The taxes on the FIFO basis would be:

$150,000 ×.30 = $45,000
Leaving Net Income of $105,000 ($150,000 – $45,000 = $105,000).

The taxes on the LIFO basis would be:

$100,000 ×.30 = $30,000
Leaving Net Income of $70,000 ($100,000 – $30,000 = $70,000).
Solution 166 (cont.)
Switching to the LIFO basis will result in $15,000 less income tax expense and less net income of
$35,000. The cash effect is $15,000 ($45,000 – $30,000 = $15,000) saved in taxes if LIFO were used.

(c) Owners of the business may favor the LIFO basis since more cash will be available for use in the
business. LIFO results in more cash being retained in the business since less is paid out for income
taxes.

Ex. 167
Compute the lower-of-cost-or-market valuation for Howe Company's total inventory based on the following:
Inventory Categories Cost Data Market Data
A $18,000 $17,200
B 14,000 14,600
C 21,000 20,500

Solution 167 (5 min.)

Inventory Categories Cost Data Market Data LCM
A $18,000 $17,200 $17,200
B 14,000 14,600 14,000
C 21,000 20,500 20,500
Total Valuation $51,700

Ex. 168
The controller of Lawn-Pro Company is applying the lower-of-cost-or-market basis of valuing its ending
inventory. The following information is available:
Cost Market
Lawnmowers:
Self-propelled $15,000 $17,000
Push type 19,000 18,000
Total 34,000 35,000

Snowblowers:
Manual 30,000 31,000
Self-start 19,000 21,000
Total 49,000 52,000
Total inventory $83,000 $87,000

Instructions
Compute the value of the ending inventory by applying the lower-of-cost-or-market basis.
6-8 Test Bank for Accounting Principles, Eighth Edition

Solution 168 (15 min.)

Lower-of-cost-or-market
Lawnmowers:
Self-propelled $15,000
Push type 18,000

Snowblowers:
Manual 30,000
Self-start 19,000
Total inventory $82,000

Ex. 169
Wert Company is preparing the annual financial statements dated December 31, 2008. Information
about inventory stocked for regular sale follows:

Quantity Unit Cost Replacement Cost

Item on Hand When Acquired (market) at year end
A 50 $20 $19
B 100 45 45
C 20 60 62
D 40 40 37

Instructions
Compute the valuation for the December 31, 2008, inventory using the lower-of-cost-or-market basis.

Solution 169 (10 min.)

Lower of Cost
Item Units or Market Extension
A 50 $19 $ 950
B 100 45 4,500
C 20 60 1,200
D 40 37 1,480
$8,130

Ex. 170
Dryer Company reported net income of $60,000 in 2008 and $80,000 in 2009. However, ending inventory
was overstated by $5,000 in 2008.

Instructions
Compute the correct net income for Dryer Company for 2008 and 2009.
Solution 170 (6 min.)
2008 correct net income = $55,000 ($60,000 – $5,000) 2009
correct net income = $85,000 ($80,000 + $5,000)

Ex. 171
For each of the independent events listed below, analyze the impact on the indicated items at the end of the
current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated U
= item is understated
NA = item is not affected
Items
Owner’s Cost of Net
Events Assets Equity Goods Sold Income
1. A physical count of goods on hand at the end of
the current year resulted in some goods being
counted twice.
2. The ending inventory in the previous period was
overstated.
3. Goods purchased on account in December of the
current year and shipped FOB shipping point
were recorded as purchases, but were not included
in the count of goods on hand on December 31
because they had not arrived by December 31.

4. Goods purchased on account in December of the

current year and shipped FOB destination were
recorded as purchases, but were not included in
the count of goods on hand on December 31
because they had not arrived by December 31.

5. The internal auditors discovered that the ending

inventory in the previous period was understated
$15,000 and that the ending inventory in the
current period was overstated
$25,000.

Solution 171 (20 min.)

Items
Owner’s Cost of Net
Events Assets Equity Goods Sold Income
1. O O U O
2. NA NA O U
3. U U O U
4. NA U O U
5. O O U O
6 - 10 Test Bank for Accounting Principles, Eighth Edition

Ex. 172
Nolan's Hardware Store prepared the following analysis of cost of goods sold for the previous three years:
2007 2008 2009
Beginning inventory 1/1 $40,000 $18,000 $25,000
Cost of goods purchased 50,000 55,000 70,000
Cost of goods available for sale 90,000 73,000 95,000
Ending inventory 12/31 18,000 25,000 40,000
Cost of goods sold $72,000 $48,000 $55,000

Net income for the years 2007, 2008, and 2009 was $70,000, $60,000, and $55,000, respectively. Since net
income was consistently declining, Mr. Nolan hired a new accountant to investigate the cause(s) for the
declines.

The accountant determined the following:

1. Purchases of $25,000 were not recorded in 2007.
2. The 2007 December 31 inventory should have been $24,000.
3. The 2008 ending inventory included inventory costing $5,000 that was purchased FOB destination and
in transit at year end.
4. The 2009 ending inventory did not include goods costing $4,000 that were shipped on December 29 to
Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the
year.

Instructions
Determine the correct net income for each year. (Show all computations.)

Solution 172 (25 min.)

2007 2008 2009
Beginning inventory 1/1 $ 40,000 $29,000 $20,000
Cost of goods purchased (1) 75,000 55,000 70,000
Cost of goods available for sale 115,000 84,000 90,000
Ending inventory 12/31 (2) 24,000 (3) 20,000 40,000
Cost of goods sold $ 91,000 $64,000 $50,000

2007 2008 2009

Net Income previously reported $70,000 $60,000 $55,000
Add: Prior cost of goods sold 72,000 48,000 55,000
Less: Revised cost of goods sold (91,000) (64,000) (50,000)
Corrected Net Income $51,000 $44,000 $60,000

(1) Additional purchases $25,000

(2) Additional ending inventory $6,000
(3) Less ending inventory $5,000
Ex. 173
Hill Pharmacy reported cost of goods sold as follows:

2008 2009
Beginning inventory $ 54,000 $ 64,000
Cost of goods purchased 847,000 891,000
Cost of goods available for sale 901,000 955,000
Ending inventory 64,000 55,000
Cost of goods sold $837,000 $900,000

Hill made two errors:

(1) 2008 ending inventory was overstated by $6,000.
(2) 2009 ending inventory was understated by $15,000.

Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items
appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or
understated (U).
2008 2009
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $ $

Owner’s equity $ $

Cost of goods sold $ $

Net income $ $

Solution 173 (20 min.)

2008 2009
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $6,000 O $15,000 U
Owner’s equity $6,000 O $15,000 U
Cost of goods sold $6,000 U $21,000 O
Net income $6,000 O $21,000 U

Correct cost of goods sold:

2008 2009
Beginning inventory $ 54,000 $ 58,000
Cost of goods purchased 847,000 891,000
Cost of goods available for sale 901,000 949,000
Ending inventory 58,000 70,000
Cost of goods sold $843,000 $879,000
 6 - 12 Test Bank for Accounting Principles, Eighth Edition

Ex. 174
The following information is available for Manning Company:

Beginning inventory $ 60,000

Cost of goods sold 600,000
Ending inventory 100,000
Sales 750,000
Instructions
Compute each of the following:
(a) Inventory turnover.
(b) Days in inventory.

Solution 174 (5 min.)

$600,000 $600,000
(a) Inventory turnover: ———————————— = ———— = 7.5
($60,000 + $100,000)  2 $80,000
365
(b) Days in inventory: —— = 48.7 days
7.5

a
Ex. 175
Vaughn Company uses the perpetual inventory system and the LIFO method. The following
information is available for the month of May:

May 1 Beginning inventory 20 units @ $5

10 Purchase 20 units @ $8
15 Sales 15 units
18 Purchase 10 units @ $9
21 Sales 15 units
30 Purchase 10 units @ $10
Instructions
Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of
May.

a
Solution 175 (10 min.)
Cost of goods sold:
May 15 sale 15 units × $8 = $120
May 21 sale 10 units × $9 = 90
5 units × $8 = 40
30 units $250 Cost of goods sold
Ending inventory:
May 1 20 units × $5 = $100
May 30 10 units × $10 = 100
30 units $200 Ending inventory
a
Ex. 176
Romano Company uses the perpetual inventory system and had the following purchases and sales
during March.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Purchase 40 $60
3/25 Sales 120 $90

Instructions
Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and
to the ending inventory at March 31 using (a) FIFO and (b) LIFO.

a
Solution 176 (20 min.)
a) FIFO

Date Purchases Sales Balance

3/1 (100 @ $40) $4,000
3/3 (60 @ $50) $3,000 (100 @ $40)
(60 @ $50) $7,000
3/4 (70 @ $40) $2,800 (30 @ $40)
(60 @ $50) $4,200
3/10 (200 @ $55) $11,000 (30 @ $40)
(60 @ $50)
(200 @ $55) $15,200
3/16 (30 @ $40) (10 @ $50)
(50 @ $50) $3,700 (200 @ $55) $11,500
3/19 (40 @ $60) $2,400 (10 @ $50)
(200 @ $55)
(40 @ $60) $13,900
3/25 (10 @ $50) (90 @ $55)
(110 @ $55) $6,550 (40 @ $60) $7,350

March cost of goods sold = $13,050 ($2,800 + $3,700 + $6,550) March 31

inventory = $7,350
6 - 14 Test Bank for Accounting Principles, Eighth Edition

Solution 176
a
(cont.)
b) LIFO

Date Purchases Sales Balance

3/1 (100 @ $40) $4,000
3/3 (60 @ $50) $3,000 (100 @ $40)
(60 @ $50) $7,000
3/4 (60 @ $50)
(10 @ $40) $3,400 (90 @ $40) $3,600
3/10 (200 @ $55) $11,000 (90 @ $40)
(200 @ $55) $14,600
3/16 (80 @ $55) $4,400 (90 @ $40)
(120 @ $55) $10,200
3/19 (40 @ $60) $2,400 (90 @ $40)
(120 @ $55)
(40 @ $60) $12,600
3/25 (40 @ $60) (90 @ $40)
(80 @ $55) $6,800 (40 @ $55) $5,800

March cost of goods sold = $14,600 ($3,400 + $4,400 + $6,800) March 31

inventory = $5,800

Ex. 177
a

Adler Department Store prepares monthly financial statements but only takes a physical count of
merchandise inventory at the end of the year. The following information has been developed for the month
of July:
At Cost At Retail
Beginning inventory $ 35,000 $ 50,000
Merchandise purchases 115,000 150,000

The net sales for July amounted to $140,000.

Instructions
Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to
support your answer.

a
Solution 177 (10 min.)
At Cost At Retail
Beginning inventory $ 35,000 $ 50,000
Merchandise purchases 115,000 150,000
Goods available for sale $150,000 200,000
Net sales 140,000
(1) Ending inventory at retail $ 60,000
(2) Cost to retail ratio = 75% ($150,000 ÷ $200,000).
(3) Ending inventory at cost = ($60,000 × 75%) = $45,000.
a
Ex. 178
Horne Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for
filing a claim with its insurance company, Horne Company developed the following information:

March net sales through March 28 $360,000

Beginning Inventory, March 1 150,000
Merchandise purchases through March 28 180,000

The company has experienced an average gross profit rate of 35% in the past and this rate appears to be
appropriate in the current period.

Instructions
Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March
28. Show all computations in good form.

a
Solution 178 (10 min.)
Net sales $360,000
Less: Estimated gross profit ($360,000 × 35%) 126,000
Estimated cost of goods sold $234,000

Beginning inventory $150,000

Merchandise purchases 180,000
Goods available for sale 330,000
Less: Estimated cost of goods sold 234,000
Estimated cost of ending inventory destroyed by fire $ 96,000

a
Ex. 179
The inventory of Snider Company was destroyed by fire on April 1. From an examination of the
accounting records, the following data for the first three months of the year are obtained:

Sales $185,000
Sales Returns and Allowances 5,000
Purchases 90,000
Freight-In 3,500
Purchase Returns and Allowances 4,000

Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit rate
of 40% on net sales.
6 - 16 Test Bank for Accounting Principles, Eighth Edition

Solution 179
a
(10 min.)
Net Sales ($185,000 – $5,000) $180,000
Less: Estimated gross profit (40% × $180,000) 72,000
Estimated cost of goods sold $108,000

Beginning inventory $ 60,000

Cost of goods purchased ($90,000 – $4,000 + $3,500) 89,500
Cost of goods available for sale 149,500
Less: Estimated cost of good sold 108,000
Estimated cost of merchandise lost $ 41,500

a
Ex. 180
Hyland Company reports goods available for sale at cost, $90,000. Beginning inventory at retail is
$40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to
$88,000.

Instructions
Determine the estimated cost of the ending inventory using the retail inventory method.

Solution 180
a
(10 min.)
At Cost At Retail
Beginning inventory $ 40,000
Goods purchased 80,000
Goods available for sale $90,000 120,000
Net sales 88,000
Ending inventory $ 32,000

First calculate the cost to retail ratio.

$90,000 ÷ $120,000 = 75%

Apply this ratio to the ending inventory at retail.

$32,000 × .75 = $24,000

$24,000 is the estimated cost of the ending inventory.